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As we start the second half of our fiscal year, I would like to review our progress during the last 12 months and to look ahead at the challenges we face. Our financial results were very strong. 1993 was a remarkable year, but not just because of the numbers. The breadth of great new software we introduced was incredible, from development tools like C++, to kids software like Creative Writer.

The diversity of our product launches last year is a real testimony to the abilities of Microsoft employees.

After four years of development we delivered a modern, powerful 32-bit operating system, Windows NT. Like any new platform, it will take time to establish itself. All of the leading indicators are very positive. First, the developer commitment and momentum towards Windows NT is evident from the 200 plus 32-bit applications available today. Second, more and more customers and Solution Providers are using Windows NT as the foundation for their high end systems. Undoubtedly, we will go through several cycles of media induced drama about whether the product is “winning” or “losing” while we pursue our long term investment in this important platform.

Our tireless innovation and drive to pioneer new technologies was certainly evident last year. Some examples of this are the innovations in the latest Microsoft Office 4.0 applications. This includes Intellisense, a technology that has moved us closer to our vision of “softer software” and raised the office suite stakes significantly. Other examples of Microsoft’s innovation are OLE 2.0, Plug and Play and Microsoft At Work. These Microsoft technologies will have widespread positive impact on customers and will provide great opportunities for hardware and software companies.

The environment in which we operate our business also changed during 1993. On the positive side, the passage of NAFTA and the successful negotiation of the GATT agreement late last year were historic achievements, ones that the US government should be applauded for. NAFTA’s Intellectual Property provisions are already having a marked impact on the Mexican software market, and creating a more favorable environment for our business. In fact, the US government’s efforts around the world in elevating the issue of intellectual property has had a positive effect on our business overall. While the issue of piracy is still a major hurdle for the software industry, the government’s work has helped raise awareness of the issue.

On the not so positive side, we’re witnessing price competition on a number of our products all around the world. To prosper in these conditions, Microsoft must be smart, nimble and focused — the traits most identifiable with our culture today. You hear a lot of talk about the term “reengineering”, but Microsoft has been reengineering itself regularly over the last 17 years. This has been a key to staying competitive and in a leadership position. In employment terms, this reengineering will sometimes require reorganization for greater efficiencies. In 1993, our headcount grew by 14% to 14,737.

While we still expect the number of employees to increase, we do not anticipate it to grow at the same rate as in the past. But the key to our continued growth as a company is not found in the percentage of headcount growth; rather it is the level of commitment every employee feels towards his/her job. To this end it is increasingly important that our managers focus more energy on empowering their employees, on communicating regularly with their teams and on reducing organizational complexities.

Anticipating and responding to our competitors is critical to our future success. This is a fast moving, intensely competitive industry. IBM, SUN, Novell and Apple continue to invest heavily in their systems software business including joint efforts like Taligent and Kaleida. Novell has a commanding lead in networking. Apple is known for better ease of use. Lotus has captured the market’s imagination with NOTES and we have been slow to respond. The primary competition for Office is Lotus’s Smartsuite yet we cannot discount Borland’s aggressive marketing nor WordPerfect and its loyal installed base. Lastly, as we adapt to change and explore new markets, we will find ourselves facing new competitors. Clearly Oracle, to name just one of the players, is a company determined to play a role in the emerging information highway.

I am optimistic about our future. In the next year we will see increasing momentum for Windows NT; the release of Chicago, our next major version of Windows; and a major roll out of our messaging and workgroup strategies with the shipment of EMS (Enterprise messaging system) and the beta testing of Cairo.

We have always made long term investments to achieve our vision. We will continue to invest in new geographies, new customer segments and new technologies. High growth markets like Asia, Africa and Eastern Europe offer enormous opportunity for us. During the last year, we established new Microsoft subsidiaries in Morocco, Turkey, Poland, Russia and China.

Another tremendous opportunity for us is the Home market. The Home user is different from our traditional customer. To be successful in this market, we need a new level of understanding of home users needs and new types of product innovation.

Another area that is very important for Microsoft is the information highway. We are making a major bet that it will be a significant growth sector for us. At this point no one knows when this investment will pay off but we are spending almost $100M per year on R&D in just this area alone. I have tremendous enthusiasm for Microsoft to lead the way in changing the way people communicate, work and learn.

I see more opportunities ahead for Microsoft than ever before. My enthusiasm for what we are doing is just as intense as it was in 1975 when Paul and I started Microsoft. I feel sure 1994 will be another great year for Microsoft.